Fitch cut Brazil’s sovereign debt rating to junk status Wednesday, the second downgrade for the world’s seventh economy as it struggles through a deep recession and a damaging political crisis.
The rating agency lowered Brazil’s status from “BBB-” to “BB+”, the first step into “speculative” or “junk” territory.
Brazilian President Dilma Rousseff is currently fighting calls for her impeachment, and the economy is mired in a worse-than-expected recession.
Both of those things are weighing on the country’s ability to honor its debts, Fitch said, adding that its outlook for the rating remained negative.
“Brazil’s downgrade reflects the economy’s deeper recession than previously anticipated, continued adverse fiscal developments and the increased political uncertainty,” it said.
Rating agency Standard and Poor’s had already downgraded Brazilian debt to junk status in early September.
The new downgrade could be painful for the reeling South American giant, since many large investment funds will not buy the debt of countries given “speculative” status by two or more rating agencies.
“A good number of foreign investment funds already got out and likely took opportune measures to protect themselves from this downgrade, which came as no surprise. But if any funds are still investing in Brazil, they could pull out in the coming weeks,” said Andre Perfeito, chief economist at Brazilian consulting firm Gradual Investimentos.
The more immediate problem, he told AFP, is that the downgrade will likely exacerbate “the ongoing bad mood and pessimism in Brazil, adding yet another ingredient to the tense political situation.”
Rousseff is fighting for her political life as she stands accused of fudging the government’s accounts during her re-election campaign last year. She maintains the budgeting maneuvers were long-accepted practices by previous governments.
Political chaos is adding to the country’s economic woes, with GDP down 4.5 percent in the third quarter year-on-year, and the national currency, the real, down a third against the dollar this year.
The International Monetary Fund expects Brazil to remain in recession for the second straight year in 2016 which, if confirmed, would be its first two-year downturn since 1930 and 1931.
– ‘Ongoing deterioration’ –
Rousseff’s administration faces an unsavory combination of recession, fiscal deficit, double-digit inflation and rising unemployment.
The president’s popularity rating is hovering at a dismal nine percent.
Fitch announced its decision hours after the administration sent Congress a 2016 budget that reduces the primary surplus target from 0.7 percent of GDP to 0.5 percent.
It also leaves open the possibility of saving nothing next year and instead paying interest on the government’s debt, ignoring recent warnings from Finance Minister Joaquim Levy, who said the country will “end up like Greece” if it does not set aside a minimum surplus.
Levy tried to sound upbeat after Fitch’s downgrade, saying he is “confident in the Brazilian economy’s capacity to resume a cycle of growth.”
Brazilian media have speculated the finance minister may soon quit, as he reportedly threatened to do if the 0.7 percent primary surplus target was not met.
The departure of the former banking executive, who has been called “Scissorhands” for his steely budgetary management, would likely only make matters worse, said Perfeito.
“The market would react very badly, because investors are seeing a situation of ongoing deterioration in the government’s accounts. And if it’s been difficult with him, without him it may be impossible,” he said.